How the Alternative Minimum Tax Works

The year was 1968, at the height of the Vietnam War. President Lyndon Johnson and Congress were searching for revenue to fund the prolonged and increasingly divisive military conflict. Johnson's treasury secretary discovered that a large amount of tax revenue was being lost to loopholes in the tax code. However, the shocking statistic that grabbed all the headlines was this: Some 155 Americans with income over $200,000 (more than $1.3 million in 2012 dollars) paid no federal income taxes in 1967 [source: Goodman].

Driven by vocal public outcry over these rich tax-dodgers, Congress passed the Tax Reform Act of 1969, which introduced a new "minimum" tax that couldn't be whittled away by exemptions, credits and itemized deductions. The original law called for a flat tax of 10 percent on income over $30,000 as the minimum a taxpayer could possibly owe to the federal government. In 1978, after a few tweaks to the original law, it was named the Alternative Minimum Tax (AMT).

Today, the AMT is arguably the most despised tax law on the books. Ironically, a law designed to target a handful of super-wealthy Americans has evolved into a tax menace that swallows up millions of middle-class families and threatens more each year. In 1970, only 20,000 Americans paid the AMT. That number ballooned to four million Americans in 2011, including 30 percent of families with income less than $100,000 [sources: Tax Policy Center and TurboTax].

So, exactly what is the AMT? Why is it so scary to middle-class taxpayers and why can't Congress fix it for good? Keep reading to get the whole story.